Interviews

Alan Greenspan: Entitlements are crowding out savings

This is a rush transcript from "Your World," May 26, 2016. This copy may not be in its final form and may be updated.

NEIL CAVUTO, HOST: All right, he took over the Federal Reserve, think about this, right before the 1987 stock market crash, the biggest one-day drop we have had before or since.

So, imagine Alan Greenspan worrying about how we avoid that sort of stuff. He says by getting candidates to be honest about our budget and our spending and not doing squat about entitlements.

Take a look.

(BEGIN VIDEOTAPE)

ALAN GREENSPAN, FORMER FEDERAL RESERVE CHAIRMAN: We have a global problem of a shortage in productivity growth.

And it is not only the United States, but it is pretty much around the world. And it is being caused by the fact that the populations everywhere in the Western world, for example, are aging, and we're not committing enough of our resources to fund that.

We should be running federal surpluses right now, not deficits. This is something we saw -- we could have anticipated 25 years ago. And, in fact, we did, but nobody's done anything about it. And this is the crisis which has come upon us. It's slowing productivity, because entitlements are crowding out savings and, hence, capital investment.

Capital investment is the critical issue in productivity growth. And productivity growth in turn is the crucial issue in economic growth. So, we're running -- we're running at the end of the -- end of this period to state of disaster, unless we turn it around.

CAVUTO: But no one shows the willingness, to your point, Alan, to do anybody about it on the right or the left.

On the left, more talk of more spending, and on the right, more talk of bigger tax cuts without paying for them. And we're expecting to hear later on in this hour from Donald Trump speaking in North Dakota. He has been loathe to touch entitlements. And that could explain, I guess, the bumpy relationship he has had with Speaker Ryan, who has yet to endorse him.

What do you think of that Trump position not to touch entitlements, at least for the time being?

GREENSPAN: Well, I think it should be -- this should be the central issue of a presidential debate, because unless and until we can rein in entitlements, which have been rising at a 9 percent annual rate in the United States and comparable levels throughout the world, we are going to find that productivity is going to maintain -- to stay at a very low rate of increase.

And, indeed, it is very likely that the productivity increase for the first half of this year could very well be close to negative, certainly for the first quarter, or the fourth quarter of last year.

But it's hard to know how the data are going to get revised.

(CROSSTALK)

CAVUTO: But do you think we're heading into a recession? Do you think we're heading into a recession?

GREENSPAN: I don't -- I don't think that is our problem.

Our problem is not recession, which is a short-term economic problem. I think you have a very profound long-term problem of economic growth at the time when, in the Western world, there is a very large migration from being a worker into being a recipient of social benefits, as it is called.

And this is legally mandated in all of our countries. The size has got nothing to do with the rate of growth in economic activity, but if we stayed down at the 2 percent economic growth or less in the United States and elsewhere, we're not going to be able to fund what we already are legally obligated to spend.

So, this should be where the debate is. It shouldn't be on 20 million different irrelevant issues. This is the most fundamental thing confronting not only our country, but all of our allies and, to a very substantial extent, by, frankly, in direction, the developed -- the developing world as well.

CAVUTO: But neither of the prominent candidates in this country are addressing that. And I guess what I'm asking you is, if you had to choose whose policies were least worrisome, whose would they be?

GREENSPAN: Well, I happen to be a fan of Paul Ryan's, who I think is a very sensible political economic type. And...

(CROSSTALK)

CAVUTO: Well, he is not a fan of Donald Trump. As you know, he is not committed to Donald Trump yet. Are you surprised?

GREENSPAN: I'm not surprised at all.

CAVUTO: Are you a fan of Donald Trump?

GREENSPAN: Not exactly.

CAVUTO: So, if it were between he and Hillary Clinton, where would you go?

GREENSPAN: You're giving me a very tough choice. And I think I will -- at this stage, I will not comment on that issue. I have yet to figure it out.

(LAUGHTER)

CAVUTO: But when I had David Stockman, as you know, Ronald Reagan's former budget director, the guy who was brought to the woodshed for famously warning at the time of the deficits and the debt to come, the argument back then was that the economy would boom, and it did, from not only dramatic cuts in interest rates under your predecessor, Paul Volcker, but the tax cuts that Ronald Reagan and his enthusiasts say really sparked the economy.

What happened, I think, as you pointed out, Doctor, is, with all those extra revenues, Republicans proved just as skillful at spending that money and then some as Republicans have claimed Democrats are.

So I wonder whether you agree with Mr. Stockman that it could be too late, that we could be on the verge a big old market economic collapse? That is what he said.

GREENSPAN: I would certainly not go that far.

We needn't go that far. And, in fact, it strikes me that, if we all want to get together and have a real debate -- and you are quite correct on something. This is a bipartisan issue. Entitlements are the third rail of American politics.

The politician who touches them loses. And so you have -- we have a 9 percent annual rate of increase in entitlements, which is mandated by law. It has got nothing to do with the economy. It has got to do with age and health and the like.

CAVUTO: Right.

GREENSPAN: And we don't have the economic resources to fund that, unless we can curtail entitlements.

The data show, shockingly, that, since 1965, the sum of gross domestic savings and entitlements as a percent of GDP has been remarkably flat. And what that tells us is, all the way back to '65, we have essentially been seeing a $1 dollar to $1 dollar tradeoff between entitlement growth and gross savings decline.

And that, despite the fact we are borrowing savings from abroad, has kept our rate of capital investment as a percent of GDP going down. That in turn has meant that productivity has slowed down, which means that economic activity will slow down, which means that entitlements will be more and more of a problem.

And there is no way out of this, except to confront it straight on. And this is where the debate ought to be, because everything else frankly will turn out to be peripheral.

CAVUTO: Well, you're right about that.

(CROSSTALK)

CAVUTO: But let me ask you, though, if you could help me with this. There are fears, given some of the run-up recently in housing numbers -- in fact, home sales in latest period running up at a 16.6 percent clip, the quickest advance, biggest advance in 24 years.

Some are worried -- I say worried in a weird good way -- that we're looking at another potential housing bubble, that interest rates have been so low for so long, that it has created a new bubble, and may be something that could produce another housing meltdown.

Do you share that?

GREENSPAN: There are lots of problems of a cyclical nature out there.

But I think that the secular problems, that is, the long-term problems are so commanding at this stage that we really have no choice but to focus directly on how to solve this. We have to right now figure out a way of getting surpluses in our budgets throughout the Western world, because Europe is in trouble. We're in trouble. In fact, Japan is in worse trouble.

But let me ask you what is going on in Venezuela, Doctor. We have seen these protest, riots. There is video that we got to FOX and it showed people collecting and eating out of garbage cans.

A lot of folks have looked at that and said, you know, that could happen here. It could get off the wheels fast here. What do you think?

GREENSPAN: Well, I think, on the way there, we basically go through Greece.

But Venezuela is about to collapse. There is no way of getting around it. The fundamentals are falling apart. And at some point, there is going to be revolt internally, as far as I can visualize it.

(CROSSTALK)

CAVUTO: Do you think that spreads, a revolt? Because some say it could extend throughout all of Central and South America. It could spread in these countries you alluded to.

In Europe, they're sick of having to tighten their belts and the constant stumbling from crisis to crisis, rescue to rescue, and that this could be part of a global pandemonium.

GREENSPAN: Well, no, I -- let's not go to extremes.

Venezuela is the extreme on the continent. And it used to be Zimbabwe. Now we have Venezuela.

CAVUTO: Right.

GREENSPAN: There is going to be an internal revolt there if they don't get that resolved.

(CROSSTALK)

CAVUTO: Should we do anything to help them? Should we do anything to stabilize them?

GREENSPAN: I don't think we can. I don't think they would accept it. And I don't think that they have the mechanisms to accept -- they don't have an infrastructure that would enable them to accept the type of aid that they need.

CAVUTO: Yes.

We were talking about the presidential race. And I know you eschew politics, for good reason. It is a swampy kind of a debate.

But does it alarm you that both candidates, both leading candidates, Hillary Clinton and Donald Trump, are not fans of the trade deals that many argue brought economic boon to this country?

Now, many are not of that opinion. But Hillary Clinton is in the odd position of rejecting the very trade deals that triggered the large job gains she brags about during her husband's administration.

Donald Trump pretty much saying the same for different reasons, that these trade deals have given American workers the shaft. What do you think of that kind of talk and the threat of an insular America?

GREENSPAN: Well, I'm obviously in favor of the trade bill.

People don't realize, and they think that you're going to shut off, for example, imports from China, that somehow that is going to create jobs in the United States. It doesn't, because then, instead of getting goods out of China, we will get them out of the Philippines or something else, some other place.

But before they come back to the United States, they are going to try every -- all other places around the world, where labor costs are perceived to be cheaper.

So, the issue of foreign trade is something which has helped this country grow going all the way back to 1790. And the presumption that, all of sudden, we're turning off on trade is very narrow-minded, in my impression.

CAVUTO: Would Alan Greenspan build a wall along the Mexican border?

(LAUGHTER)

GREENSPAN: I don't have the physical staff to do it.

(LAUGHTER)

CAVUTO: That is a very good answer. I think they call that a nonanswer.

But, you know, I was thinking of the migrants as well, Alan, and what is going on. A lot of nations are building walls, and some for very valid reasons. They're concerned, their safety, attacks in Paris, Brussels, what have you.

So you can understand where it is coming from. But do you worry the global message this is sending, that it is a bunch of I think one economist likened to a lot of tents locked up in the same campground?

GREENSPAN: Look, we have been through generation after generation in which free trade has propelled our country 100 years after we were sort of hanging on the eastern edges of the Atlantic Seaboard barely surviving.

One hundred years later, we were the most productive economy in the world. Now, that took an extraordinary amount of effort, but, fundamentally, it was based on free trade. And if you cut down on imports, for example, you have to ask yourself, whose purchase are you basically cutting down?

If people, for example, can get much cheaper clothes from China, you shut down trade, and they will be paying much higher prices. I don't see to whose advantage this is. The presumption that it's a job-killer does not square with the historical facts. Trade is a positive force for employment at all levels of the economy.

CAVUTO: Alan Greenspan, it has been a real pleasure. Thank you for taking the time.

Some historic moments there. I will get back to you on the equipment you will need for that wall, Alan, OK?

I guess a shovel and a lot of bricks and all, but we will get back to you.

(END VIDEOTAPE)

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